Now you see it, now you don’t: binding contract disappears on appeal

October 20th 2015

The Court of Appeal in NSW has overturned a decision that discussions and correspondence between solicitors in the lead-up to Christmas in 2014 to wind up a joint venture had created a contractually binding agreement on the solicitors’ clients (on the one hand, Universal Music, and on the other a Mr Pavlovich and his company).

the lawyers for Mr Pavlovic and his company had told the lawyers for Universal Music that Mr Pavlovich “would sign tomorrow” (even though he never did);

Mr Pavlovich had acted in a way that “reasonably indicated” he was performing his obligations under the deed; and

Mr Pavlovich had represented to Universal that he had signed the deed and would be returning the signed document.

In overturning the decision, the Court of Appeal stressed the principle that, where parties reach agreement as to all the terms of a contract, but also agree to sign a further, formal document, whether or not the parties are already bound has to be assessed objectively, looking at all the context. The important issue is whether or not the parties intended to be legally bound before the formal document was signed. In this case, the Court of Appeal found that this was not the case – at all stages of the negotiation, it was clear that the winding up of the joint venture would be concluded formally, in a deed.

In relation to whether Mr Pavlovich’s lawyer had power to bind him and his company to any agreement, the Court of Appeal noted that lawyers will generally have both actual and ostensible authority to negotiate on behalf of their clients. However, the Court of Appeal stated that (leaving aside litigation, where the situation is different) it will only be where there is “clear and cogent evidence” that a lawyer’s authority would extend to contractually binding a client. In this case, there was no such “clear and cogent evidence“.

The case is a reminder to always be clear in negotiations as to when a binding contract will be reached, and to consider clear wording in the written contract itself to confirm what has been negotiated (for example, by stating that there will be no agreement until signature).